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Rich Posson: Summer to keep milk hot

Agriculture.com Staff 06/18/2007 @ 7:17am

Milk production normally declines on a monthly basis from May into October to February. With demand as referred to as strong, it seems production reports showing positive growth will mean little to the trade. The more important question during times of tight supply is one of what will occur than what has occurred.

The cold storage reports only add support to this potential free market equation. Inventories are increased from January into July, thus adding buffer for the fall months when production is the lowest. But, this process also takes away available supply for spring and summer months.

So, weather becomes the more important fundamental driver during summer months. The trade must deal with the questions of will production of milk be reduced from hot weather (short term) and will there be sufficient amounts of crops with good nutritional quality to support aggressive production (long term).

Current weather forecasts allow for a hot summer. Crop watchers are concerned of a drought in the Southeast spreading into the eastern Corn Belt. The latter would impact a larger amount of dairy production.

Current economic indicators offer support to the opinion of net growth of the US economy and the global economy. As a result, this offers support for domestic and export demand of US agricultural commodities.

My models made a bullish signal for US commodity indexes a few weeks ago and assume a higher price trend into July or August. There is also potential for the long term trend to increase commodity values into 2008.

Technically, the seasonal trend offers a peak for strong priced years, during August to October for the milk market. This could relate to the fundamental development that price is high enough relative demand and/or that the risk of lower supply has been reduced. A correction during the fall months would then be in order. Essentially, even long term trends are bullish.

Some of the intermediate indicators followed at my firm exhibit overbought condition with inharmonious action. This is a set up for a future top in price. This action could mean that price will rally short term into July for a top and ahead of the seasonal September top.

Cash price has achieved the 2004 record high price, which should cause technical analysts to consider the chance for a double-top. Have the fundamentals also run their bullish course?

The models show an intermediate trend-bottom was placed in May and as a correction within an annual to long term up trend. Models assume an intermediate top was placed ahead of the bottom and during the same month. A forecast suggests a short term trend-top was due last week or is due this week and may or may not relate to current dairy reports. The related down swing from this top into a short term-bottom should cause a short term correction by definition and price should rally into July following this correction.

Models offer equal probability for the highest price in July to be higher than the highest price of August through October, versus the normal seasonal highest price of August through October with September as seasonal peak. Although the trend may be sloppy now in that milk has rallied fast enough to create sticker shock at the grocery, I favor the trend to be stable to higher into the seasonal peak time.

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